Thursday, February 6, 2014

Precision CastParts' Risk Exposure

Like most of the stocks in our portfolio, the volatility in the markets have been the impetus for sluggish movement in Precision CastParts (PCP). Although there has been record global demand in the commercial aerospace industry, it is important to understand how PCP's business model fits in the frame of macroeconomic events. A substantial part of PCP's contracts are conducted with a small number of very large customers. For example, both General Electric and Boeing account for nearly half of PCP's total organic revenue. Any slowdown in the global economy could translate to order cancellations in the aerospace market which would obviously hurt PCP's profitability. For this reason it is valid to understand how PCP's customers are reacting to global events.
With currencies in emerging markets falling as a result of the Fed's change in monetary policy, aerospace manufacturers are finding better ways to maintain an equilibrium between production and demand. For example, to mitigate the risk of order cancellations stemming from plummeting currencies in developing nations, Boeing is cushioning itself from the turmoil by backlogging orders of its highly demanded 737 jet. By keeping factories busy for several years, airline manufactures are reacting much better to external stimuli than they have with previous boom-and-bust cycles. Emerging countries' potential to cancel orders is what I think is the key risk component of PCP and we will have to be sure to monitor this risk accordingly.